A CFO's Guide to Transforming FP&A

A CFO’s Guide to Transforming FP&ATaking a fresh look at the technology, data and processes that can improve financial planning and analysis

N e w s & I n f o r m a t i o n f o r S e n i o r F i n a n c e E x e c u t i v e s

www.cfo.com

A CFO’s Guide to Transforming FP&A is published by CFO Publishing LLC, 295 Devonshire Street, Suite 310, Boston, MA 02110. Kim Ann Zimmermann edited this collection.

Copyright © 2017 CFO Publishing LLC. All rights reserved. No part of this book may be reproduced, copiewd, transmitted, or stored in any form, by any means, without the prior written permission of CFO Publishing LLC.

A CFO’s Guide toTransforming FP&A

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CONTENTSFOREWORD

An Effective FP&A Process Adds Value 4

TECH ADVANTAGE

Streamline FP&A by Investing in Analytics Tools 5

BE FLEXIBLE

Change Demands Fast Financial Forecasting Updates 8

FINANCE GOAL

Align FP&A with Strategy to Optimize Results 12

CONCLUSION

Moving Toward a More Mature FP&A Process 13

A CFO’s Guide to Transforming FP&A



An Effective FP&A Process Adds Value

FOREWORD

Financial planning and analysis is a core function of the finance team, and a company’s ability to gauge its performance is closely tied to the finance team’s approach to FP&A. As a result, many CFOs are looking to execute FP&A in a more strategic way to provide greater value to the organization.

“If an organization is struggling with its ability to gauge performance becomes a difficult situation for finance and FP&A overall,” said Brad Frink, Director, Finance Transformation, The Hackett Group, said in a recent webcast titled, “The CFO Playbook on Forecasting: Why Finance Should Reinvent FP&A.”

One of the ways that CFOs can drive performance is by improving the FP&A process. When webinar attendees were asked if CFOs play a vital role in maintaining a culture of accountability surrounding FP&A, 91% said they agreed or strongly agreed.

Progressive finance organizations recognize that technology and analytics are vital to maximizing the FP&A process. CFOs are looking to utilize cloud-based applications and employ robotics to perform some routine reporting and analytics activities.

In addition, progressive organizations are looking

to outside sources of data such as social media metric to become more adept forecasting and analytics acumen. “When it comes to FP&A, finance chiefs have to be adept at gathering intelligence inside and outside the organization to have a real impact,” Frink said.

Non-traditional metrics are also key to implementing a successful FP&A process. “To advise on the business, you need be familiar with metrics around employees, customers and operations, which are outside of the financial scope,” said Miles Ewing, Principal, Deloitte Consulting LLP.

This eBook will explore:

• How strategic investment in analytics tool can shave time off the FP&A process while improving data quality;

• Why FP&A stakeholders are advocating for changes to the traditional budgeting and planning process to provide greater flexibility and visibility into organizational spending trends; and

• How forward-thinking FP&A professionals are working to accommodate the current fast-paced business environment and incorporate financial and non-financial data. g



Tech Advantage:Streamline FP&A byInvesting in Analytics ToolsIt might not come as much of a surprise to learn that the more companies spend on analytics technology, the better the performance of their financial planning and analysis functions.

What might be less intuitive is just how extreme the advantage is when using more FP&A-oriented technology.

In the Association for Finance Professionals’ new survey of 255 FP&A practitioners, 55% said they primarily use spreadsheets to deliver analysis for the planning, budgeting, and forecasting process.

AFP’s research, however, strongly suggests companies where spreadsheets are king are stuck fast in the past and falling far short of optimizing their FP&A functions.

The survey results reveal that where investment in technology accounts for less than 10% of total FP&A spending, companies expend an average of 384 FTE days per year, and a median of 60 FTE days, to collect and manipulate budget data (each “day” being the equivalent of one day of work by a full-time-equivalent staffer).

Spending incrementally more on technology makes a huge difference. Where technology is 10% to 19% of FP&A



spending, the mean number of FTE days devoted to such activities falls by more than half, to 154, while the median also drops by half, to 30 days.

In fact, the more that’s spent on technology, the less time wasted on “grunt work.” Companies for which technology is 20% to 49% of the FP&A budget expend an average of just 62 days, and a median of only 14 days, to collect and manipulate data.

AFP cited a separate study conducted by Nucleus Research in 2014 that found the average return from each dollar spent on analytics technology was $13.01.

The ability to automate transactional and reporting activities represents a big move up the maturity curve for FP&A, which not many years ago was typically a mostly backward-looking function.

“Greater investment in technology liberates FP&A staff to do what they were hired to do, and what their organizations need them to do: conduct robust analysis and forecasting to better inform their company’s strategic decisions,” says Jim Kaitz, AFP’s president and CEO.

Many new analytics tools offer “self-service” functionalities that do not require IT-department intervention, which often results in bottlenecks and delays in delivery of timely analysis to management and business leaders, according to AFP’s report on the research.

Investment in technology also allows companies to look further into the future. Predictive analytics is a functionality that many FP&A teams see as the next big step forward, AFP notes.

“Cloud-based solutions free up FP&A analysts to run their own queries, giving them a chance to use real-time information to feed predictive models,” AFP says. “FP&A functions that are not yet able to ask the ‘why?’ and ‘what’s next?’ questions realize they must acquire this capability.”

While large companies currently make greater use of predictive analytics than smaller ones, interest in the use of such technology is agnostic as to company size. Among those with annual revenue of at least $10 billion,



41% said they currently use predictive modeling for activities including forecasting and time-series analysis. And 45% identified it as a capability they expect to acquire in the future.

By comparison, only 15% of companies with revenue between $1 billion and $9.9 billion use predictive modeling. But 43% of them are looking to a future that includes that technology.

Interest is even greater among firms with revenue of less than $1 billion: while 13% of them use predictive analytics now, 58% are targeting it for future use.

Another finding of the study is that analytics technologies allow companies better access to data. At 40% of companies, according to the research, data is still locked at business-unit levels, with insights generated by departments and lines of business.

Only 9% of survey respondents said that “real-time, internal and external data is readily accessible across the enterprise based on need, information is shared extensively across the enterprise, and data-driven decision-making is part of the organization’s culture.” g

i Investing in modern analytics tools will result in in staff time saved and better-quality analysis, according to a recent report. Companies for which technology is 20% to 49% of the FP&A budget expend an average of just 62 days, and a median of only 14 days, to collect and manipulate data.

i One of the most compelling trends in FP&A transformation is the ability to automate transactional and reporting activities. Until recently, FP&A technology was primarily concerned with analyzing historical data rather than predicting future growth.

i One of the challenges of FP&A is the amount of data that remains locked in silos across the organization. While analytics technologies enable better access to data, only 9% of survey respondents said that real-time, internal and external data is readily accessible across the enterprise.

CFO SUMMARY



The pace of technological and economic change demand fast financial forecasting updates, CFOs find.

Many companies aren’t very smart about managing their spending, and a primary contributor to the deficiency is inadequate budgeting practices, according to research and advisory firm CEB.

More specifically, companies that use only one or two budgeting models across all business units and functions would likely make better spending decisions if they used three or all four of the most common budgeting models, a new CEB study suggests.

Those four models are:

• Historical budgeting, or a mix of top-down and bottom-up budgeting based on historical data, with adjustments made for factors such as expected growth and market expectations.

• Driver-based budgeting, a less-detailed approach that identifies the organization’s key business drivers and mathematically models how they will impact resourcing and, hence, expenses in future period.

• Rolling-forecast-based budgeting, where a forecast

Be Flexible:Change Demands Fast Financial Forecasting Updates



from the previous year is used to set the current year’s budget one to two quarters in advance.

• Zero-based budgeting — in which any expense in a particular cost center, department, or business unit — needs to be justified for every new period.

The most efficient companies align the model used with the environment and needs of each particular business and function, CEB says.

BOTTOM-LINE IMPACTIt’s clear that much is at stake in the budgeting choices a company makes. CEB asked 79 financial planning and analysis (FP&A) professionals, “If perfect budgeting leads to 100% achievement of your revenue and profit growth potential, how much of that growth are you sacrificing due to your current budgeting approach?”

The participants collectively estimated that their companies sacrificed 17% of both potential revenue growth and potential profit growth because of imperfect budgeting practices.

A key reason for that slippage, according to CEB, is that traditional budgeting practice, in which companies have limited variability in budgeting models used across business units and functions, does not have a positive impact on what the research firm calls “cost IQ.”

Companies with a high cost IQ have continuous visibility at the corporate level into current cost information tied to growth drivers, and not cost centers, CEB says. They also have: high confidence in current spending decisions that impact the future; explicit understanding of how costs relate to operational activities (such as how IT expenses increase with the number of employees or offices, or how travel costs vary with sales force size); and the ability to make unbiased mid-year resource allocation decisions.

Yet, only 35% of the study participants indicated that they are confident — i.e., on a 7-point scale they rated their level of confidence as a 6 or 7 — they can give corporate leaders updated expense information on business units without help from the businesses. Also, just 30% of those surveyed believed business managers would be confident

making decisions based on such information.

And a mere 13% said company executives would easily understand why the updated expense information came in where it did.

“Companies’ cost IQ tends to be low,” says Johanna Robinson, finance practice leader at CEB. “It’s hard for most companies to answer questions about what their true costs are, why costs look the way they do, and what that means for future decisions. The goal is to be able to do that at any point in the year, and it’s an important goal, because it contributes directly to the bottom line.”



A big reason that cost IQ is low has to do with the mix of budgeting models used, Robinson continues. “Using three or more of the budgeting models improves cost IQ significantly,” she says.

According to CEB research, among top-quartile companies in cost IQ, where the average score is 5.63 on the 7-point scale, 55% of companies use at least three of the four budgeting models (which CEB calls “multi-model budgeting”). On the other end of the scale, among bottom-quartile companies, whose average score is 3.1, only 5% practice multi-model budgeting.

Yet only 30% of companies employ multi-model budgeting, according to CEB.

OLD-FASHIONED THINKING?The research shoots holes in the main reasons that companies continue to limit the number of budgeting models they use across business units and functions.

One of those reasons is a desire to standardize budget processes. But 69% of FP&A professionals reported

that multi-model budgeting processes are highly standardized (again, 6 or 7 on a 7-point scale), compared with only 39% for traditional budgeting. Companies that practice multi-model budgeting “invest in making sure that templates, timelines, and other processes are standard,” says Robinson. “It’s not the model itself that’s standardized. It’s the processes.”

Another objection to multi-model budgeting is a desire to treat businesses equally and avoid creating conflicting messages that could dilute the value of budgeting to business managers and functional heads. But 64% of survey respondents said such FP&A stakeholders perceive multi-model as valuable, while just 36% said the same for traditional budgeting.

Third, some companies think they will need to hire more consultants to implement or improve multi-model budgeting. But, according to CEB research, the proportion of companies that use consultants for those purposes is virtually the same for those that practice traditional budgeting and those that employ multi-model budgeting (35% and 33%, respectively).



Finally, some companies think diversification of models will impose a high burden on small corporate FP&A teams. In reality, however, the average size of corporate FP&A teams at companies that use traditional budgeting is 13.9, compared with 9.8 for companies that use multi-model budgeting, according to CEB.

“A lot of the work that’s done in conjunction with some of the budgeting models is actually done in the businesses,” says Robinson. “Corporate finance is more about making sure all of that flows up into corporate-level budgets.”

CEB recommends that to move to multi-model budgeting, companies should match budget models to business units and functions based on their operating attributes (see sidebar below). They also should deliberately phase in the introduction of new business models to avoid giving the organization a case of change management fatigue.

And, they should build a “budgeting 2020” framework that is based on three critical multi-model budgeting capabilities: higher analytic competence in FP&A; integration of operational and financial data; and better use of planning tools. g

i Continuous improvement of the forecasting process is the most consistent approach to delivering shareholder value. Poor budgeting practices can result in potential revenue growth and potential profit growth.

i Inadequate spending management is a top reason for budgeting and forecasting deficiencies.

i Research shows that companies can benefit by varying the budgeting model used for particular business units and functions, research shows. However, businesses should invest in standardizing templates, timelines, and other FP&A processes.

i Integration of operational and financial data and more adept use of planning tools provide multi-model budgeting capabilities that results in higher analytic competence in FP&A.

CFO SUMMARY



Finance Goal:Align FP&A with Strategyto Optimize Results

Now more than ever, companies are asking their CFOs to provide sound advice on strategy: how to attract customers with the right blend of pricing, choice, channel, service, and margin.

Operating leaders also want finance’s help with plan execution. They want finance chiefs to forecast and track the flow of current revenue and profit streams with a high deal of accuracy — and help them to avoid unexpected obstacles that could smash their plans to smithereens. Three out of four senior finance executives out of a total of 154 who took a 2016 survey by APQC, the Houston-based business benchmarking

and research firm I work for, now have process improvement initiatives underway.

A primary goal is better financial planning and analysis (FP&A). More than half say they are reacting to calls from senior business executives for better performance insights.

While executives are requesting more data to help with FP&A, organization have to be careful about how they gather and present the performance metrics so as not to overload users. “You have be careful not to choose too many metrics and lose focus,” said Miles Ewing, Principal, Deloitte Consulting LLP in a recent webcast,



“The CFO Playbook on Forecasting: Why Finance Should Reinvent FP&A.”

Sounds simple enough: rev up FP&A. But effective financial management may require a deep change in the way finance carries out its mission. APQC research finds a sharp contrast between (a) what CFOs want to do to make performance management relevant and (b) the hide-bound conventions and staff capabilities they are stuck with. Despite aspirations, more than one-third are tolerating poorly aligned or unacceptable models for FP&A.

REASONS FOR MISALIGNMENTThere are many reasons for this misalignment. For one thing, CFOs report being hampered by poorly integrated flows of data from financial-transaction systems as well as by poor access to non-financial data such as those controlled by supply and demand planners. Perhaps it’s no surprise that only 50% of a total of 130 finance teams who took APQC’s 2015 survey on planning models are doing rolling forecasting. We also hear about finance staff so overcome by manual data gathering and manipulation that there’s no time left for building analytical skills and talent. Beleaguered staffers have all they can do to close the books and deliver official financial statements in a reasonable amount of time.

Further constraints involve bad habits that some CFOs and controllers allow to dominate periodic business reviews. Let’s assume that a given group of capable managers is sincerely working hard to drive growth. If a set of monthly targets is glowing red, don’t let the meeting get stuck on the budget-versus-variance analysis, which merely says the horses have left the barn.

Spend some time on the underlying assumptions behind the original plan — maybe talk about why forecast inputs were faulty in the first place. Get the business operators to talk without fear of being ignored or shunned about what they can do to get a disappointing performance trend turned around. You can be tough in examining the truth about current conditions without making everybody shut down.

Continuing in the vein of practical collaboration, let’s

turn to the annual budgeting process. Chances are that it’ll take too long. Data from APQC’s benchmarking assessments of American companies indicate a wide disparity on this score. The top performers, the top quartile of the 1,100-company data set, can wrap up the budgeting process in 28 days or less. The weakest performers, those in the bottom quartile, need 90 days or more. At the median, the mid-point in the range, the cycle time is 40 days.

It’s a good bet that a lot of organizations waste hours e-mailing spreadsheets back and forth between the controller’s office and the operating departments. Then there’s the time spent manually entering data into a



master plan. That’s the logistical side of budgeting, and software vendors are happy to explain how CFOs can easily replace such antiquated approaches with a cloud-based solution.

But back to those old bad habits. Our research shows that nearly seven out of 10 survey participants use “last year plus x percent growth to generate a y percent profit increase” as the watermark when setting annual budget targets. At the same time, they don’t bother to do much in the way of “what-if ” and predictive analysis to inform decision making.

It’s striking that these traditional budgeting and planning methodologies remain paramount when strategy and management gurus across the land are talking about the fast-paced and risk-filled nature of commercial competition. How can this be?

One senior finance executive explained it this way: “You will not get funding to invest in tools to make finance more effective unless you can cite a new compliance requirement.” While it’s true that business leaders today talk enthusiastically about the appeal of predictive business analytics, they remain stingy when it comes to modern performance management.

What’s a CFO to do? Vow to create an atmosphere in which sincere collaboration thrives. Begin to engage profit-and-loss-statement owners in candid conversations about what constraints, risks, and opportunities they see coming up. Sure, people will always want to have furious debates about what’s possible and what’s not. Set your

timer for 10 minutes and let them go at it. But spend a lot of time prompting reasonable conversations about the nuances of operating performance long before the first quarter is over. g

SOURCES: “Disappointed with FP&A? Ramp Up Tech Spending,” David McCann, CFO.com, October 7, 2016, Copyright © 2016 CFO.com.

“Budgeting Inflexibility Cripples Bottom Line,” David McCann, CFO.com, August 25, 2016, Copyright © 2016 CFO.com.

“Effective Planning May Require Deep Finance Changes,” Mary Driscoll, CFO.com, August 24, 2016, Copyright © 2016 Mary Driscoll.

i The pace of technological and economic change demand fast financial forecasting updates. CEOs are relying on their finance chiefs to drive performance at all levels and drive strategy, including sales, pricing and customer acquisition and retention.

i Among the reasons for a misalignment between strategy and FP&A are a lack of data integration from financial-transaction systems and limited access to non-financial data. Another challenge is that the budgeting process takes too long to accommodate today’s fast-paced and risk-filled business environment.

i CFOs can take a leadership role in bringing together FP&A and strategy by collaborate with business units about future constraints, risks, and opportunities It is imperative to have deep conversation about operating performance on an ongoing basis.

CFO SUMMARY



The finance team plays a critical role boosting an organization’s performance management maturity by identifying value drivers and aligning them to financial measurements. A high-functioning FP&A process produces consistent forecasts and connects business metrics to their overall impact on the organization’s future goals.

While traditional FP&A process focuses on finance measurements, progressive CFOs are expanding the role of planning and analytics to encompass more strategic areas of performance such as customer satisfaction, operational efficiency and even employee engagement. In addition, finance teams are incorporating outside intelligence, such as market conditions and competitors’ plans, to increase the value of FP&A.

When combined with financial measurements, these indicators help align FP&A with overall strategy to improve performance.

Key takeaways from this eBook include:

FP&A needs to reach beyond the finance team. “Performance is everyone’s business,” said Frink of The Hackett group. “FP&A needs to be a cross function effort, that include sales, marketing and operations, among other functions. Otherwise, you get a short-sighted view of performance.”

CFO needs to take charge of automation and data

management. Cloud-based solutions can help improve visibility and automate some routine tasks. This helps the finance team focus on strategic initiatives and cross-functional collaboration.

Today’s business environment demands flexible forecasting. The finance team must establish a flexible forecasting process that can quickly adjust to evolving business goals.

FP&A is an evolving process. “An FP&A strategy that works today doesn’t necessarily work tomorrow,” said Deloitte’s Ewing. “You need to stay flexible and focused.” g

Moving Toward a More Mature FP&A Process

CONCLUSION

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A CFO's Guide to Transforming FP&A